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RBS Managers Condoned Libor Manipulation

Royal Bank of Scotland Group Plc managers condoned and participated in the manipulation of global interest rates, indicating that wrongdoing extended beyond the four traders the bank has fired.

In an instant-message conversation in late 2007, Jezri Mohideen, then the bank’s head of yen products in Singapore, instructed colleagues in the U.K. to lower RBS’s submission to the London interbank offered rate that day, according to two people with knowledge of the discussion. No reason was given in the message as to why he wanted a lower bid. The rate-setter agreed, submitting the number Mohideen sought, the people said.

Mohideen wasn’t alone. RBS traders and their managers routinely sought to influence the firm’s Libor submissions between 2007 and 2010 to profit from derivatives bets, according to employees, regulators and lawyers interviewed by Bloomberg News. Traders also communicated with counterparts at other firms to discuss where rates should be set, one person said.

“This kind of activity was widespread in the industry,” said David Greene, a senior partner at law firm Edwin Coe LLP in London. “A lot of the traders didn’t consider this behavior to be wrong. They took it as the practice of the trade. This is how things operated, and it seemed harmless.”

RBS, 81 percent owned by the British government, is one of at least a dozen banks being probed by regulators worldwide over allegations that traders colluded to manipulate the benchmark interest rate so they could profit from bets on interest-rate derivatives. Barclays Plc, Britain’s second-biggest bank, was fined 290 million pounds ($470 million) in June for rigging the rate, used for more than $300 trillion of securities ranging from mortgages to student loans. Chief Executive Officer Robert Diamond and Chairman Marcus Agius resigned in the aftermath.

Regulators are now probing RBS’s yen, Swiss franc and U.S. dollar sales-and-trading businesses, all part of the fixed-income division Fred Goodwin expanded before he was ousted as CEO in 2008, said two people who asked not to be identified because the bank’s internal investigation, begun more than two years ago, is still in progress. Investigators are focusing on the firm’s swaps, inflation-trading and foreign-exchange teams, as well as on money-market traders who made daily Libor submissions, the people said.

The rate-rigging allegations are the biggest blow to the Edinburgh-based lender since it took 45.5 billion pounds from taxpayers in the largest bank bailout in history and Stephen Hester replaced Goodwin. Analysts including Morgan Stanley’s Huw van Steenis estimate the scandal may cost RBS, the country’s third-biggest bank by assets, more than any U.K. competitor.

RBS fell as much as 1.8 percent and was down 1.2 percent at 268.20 pence as of 11:45 a.m. in London trading today.

Rate-Setting

The process of setting rates was open to abuse because RBS failed to establish guidelines until June 2011, four people familiar with the business said. Managers encouraged rate-setters to discuss Libor with traders across the company as a way of ensuring the bank’s submissions reflected market conditions, particularly after money markets froze in 2007, the people said. These communications -- by e-mail, instant messages and telephone -- are the focus of regulators’ probes.

The bank’s seating arrangements helped facilitate these interactions. Money-market traders who made the firm’s daily Libor submissions sat on the same desk as derivatives traders whose profits rose and fell depending on where Libor was set, three people said. When the rate-setters were away, derivatives traders were asked by managers to make the submissions themselves, the people said.

The U.K.’s Financial Services Authority imposes no restrictions on banks to prevent communications between traders and rate-setters about Libor beyond a broad requirement for them to identify and prevent conflicts of interest, according to guidelines posted on the agency’s website.

RBS fired four employees last year for allegedly rigging Libor rates. So far no senior managers have been suspended or fired, according to a person with knowledge of the matter.

The bank is weighing disciplinary procedures against some employees, one person said. As part of the probe, in-house investigators have to draw the distinction between undue influence and reasonable sharing of information within the firm, two people said.

Mohideen Denial

Mohideen, who joined RBS in 2006, was put in charge of rates trading for Europe and the Asia-Pacific region in 2010. In January, he welcomed an award presented by Risk magazine naming RBS as the top provider of inflation derivatives as a “great endorsement” for the unit, which allows customers to speculate on consumer-price indexes, according to a statement from the bank. He also sits on the global rates board of the Association for Financial Markets, a London lobbying group.

Mohideen denies he pressured anyone to submit false rates.

“That didn’t ever happen,” he said by telephone.

He referred all further questions to RBS spokesmen. The bank said in a statement that its internal probe into rate-rigging is continuing and that it’s cooperating with regulators.

“We have to make an apology for the behavior of a few of our traders,” Finance Director Bruce Van Saun said in an Aug. 3 Bloomberg Television interview as the bank posted a 22 percent drop in second-quarter operating profit.

Hester told reporters on the same day that, for the industry, Libor has “more to do with the wrongdoing of individuals than it is to do with a systemic problem.”

Libor is calculated by a poll carried out daily on behalf of the British Bankers’ Association that asks firms to estimate how much it would cost to borrow from each other for different periods and in different currencies. The top and bottom quartiles of quotes are excluded, and those left are averaged and published for individual currencies before noon in London.

Regulators are examining whether traders tried to rig benchmark rates for profit, sometimes by colluding with their counterparts at other firms. They also are examining whether some lenders understated their borrowing costs during the financial crisis to appear healthier than they were.

At RBS, watchdogs are focused on whether traders attempted to rig the benchmark rate for profit rather than whether the firm artificially depressed its Libor submissions to look better, two people familiar with the probes said.

The Monetary Authority of Singapore is asking lenders who are part of the Association of Banks in Singapore’s rates-setting panel to review the process for non-deliverable forward foreign-exchange contracts, the central bank said in a statement yesterday. Banks should report any irregularities immediately and take disciplinary action against any staff involved, it said.

The banking group sees “the need for stringent and robust processes to be in place to ensure the credibility and integrity of the rate-fixing process in Singapore,” it said in a statement.

Goodwin Expansion

The alleged manipulation followed an expansion at RBS under Goodwin, Chairman Tom McKillop and Johnny Cameron, chairman of the investment bank. The company’s balance sheet ballooned to 2.4 trillion pounds in 2008 from 369 billion pounds in 2001, Goodwin’s first full year as CEO.

Goodwin didn’t respond to a request for comment through his public-relations firm. Cameron didn’t reply to a telephone message left at Gleacher Shacklock LLP in London, where he’s a senior adviser. McKillop didn’t answer requests for comment left at Swiss drugmaker Evolva Holding SA, where he is chairman.

The traders RBS fired last year for inappropriately seeking to influence yen Libor submissions are Tan Chi Min, the company’s Singapore-based head of Asian delta trading, which makes markets for clients seeking to trade securities tied to interest rates and also places its own bets on their future direction; Neil Danziger, a yen foreign-exchange trader; and Paul White, one the bank’s main rate-setters in London. Andrew Hamilton, a London-based Swiss franc rates and foreign-exchange trader, also was dismissed for asking White to change RBS’s Libor submissions for the franc.

The former employees declined to comment or couldn’t be traced through the Internet or directory assistance.

At least three more traders were suspended for similar conduct, two of whom were later reinstated, people familiar with the suspensions said. While U.S. regulators are examining wrongdoing by U.S. dollar traders, no one has been fired.

Tan sued the bank for wrongful dismissal in December, alleging in his suit at the Singapore High Court that rate manipulation was systemic at RBS and involved traders and managers across the company.

Senior Managers

Tan also named Mohideen in his lawsuit as one of the managers who sought to influence RBS’s yen Libor submissions. Other managers who acted in the same way, according to Tan’s suit, include Robert Brennan, now Singapore-based head of treasury markets for Asia, and Kevin Liddy, the London-based global head of short-term interest-rate trading.

The practice was well-known to senior managers including Scott Nygaard, global head of RBS’s treasury markets in London; Todd Morakis, the Singapore-based head of trading for emerging markets; and Lee Knight, the Tokyo-based chief operating officer of global trading, Tan said in his filing.

RBS said in a statement that it’s contesting Tan’s lawsuit. Nygaard, Morakis, Brennan and Liddy declined to comment when contacted by Bloomberg. Knight didn’t respond to phone and e-mail messages.

RBS is among 13 banks that set yen Libor, 18 that determine U.S. dollar Libor and 11 that submit Swiss franc rates.

By influencing their own bank’s submissions, traders could nudge where Libor was fixed each day, helping to boost the value of their derivatives holdings, Andrew Verstein, a lecturer at Yale Law School, said in a paper to be published in the Winter 2013 issue of the Yale Journal on Regulation.

This strategy was employed by traders on RBS’s swaps, inflation-trading and foreign-exchange desks, all of which built positions using derivatives whose underlying value was determined by where benchmark rates were set, the people with knowledge of the banks’ trades said.

Attempts to rig the rate would be even more effective if done in collusion with counterparts at other firms. Former RBS traders Will Hall and Brent Davies are among six people named by Canada’s Competition Bureau in a probe into interest-rate rigging. The bureau accused the London-based traders in papers filed with the Ontario Superior Court in May of agreeing to participate in attempts to coordinate yen Libor submissions by at least six banks. The regulator is focusing on former UBS AG trader Thomas Hayes, according to a person briefed on the probe.

Interbank Conspiracy

Employees at RBS, HSBC Holdings Plc, JPMorgan Chase & Co., Citigroup Inc., Deutsche Bank AG, as well as interdealer brokers ICAP Plc and RP Martin Holdings Ltd. were involved in the conspiracy, the Canadian regulator said. Spokesmen for the firms declined to comment on the suit. Greg Scott, a spokesman for the Competition Bureau, wouldn’t comment about Hayes.

Hayes worked as a trader at RBS between 2001 and 2003, according to the Financial Services Authority register. Hall and Davies left RBS in 2009, the register shows. Hall now works for Morgan Stanley in Australia, and Davies is at ICAP in London.

Davies didn’t respond to e-mail and text messages, and Hall didn’t reply to e-mail and phone messages. Hayes couldn’t be traced through the Internet or directory assistance.

Another former RBS trader, Philippe Moryoussef, is being investigated by regulators for leading attempts to rig the euro interbank offered rate, or Euribor, while he was at Barclays by colluding with traders at other firms, a person with knowledge of the matter said. Moryoussef left Barclays to join RBS in 2007 and worked there until 2009. He didn’t return messages sent through LinkedIn and couldn’t be contacted through directory searches in Singapore or London.

The Libor scandal may cost the industry about 7.8 billion pounds in fines and settlements of civil lawsuits, van Steenis, a London-based banking analyst at Morgan Stanley, wrote in a July 12 report to clients. For RBS, the bill may be as much as 1.1 billion pounds, he said.

The bank is in talks with regulators, making it difficult to estimate the size or timing of any potential settlements, two people familiar with the discussions said.

Hester, 51, probably will survive any fine, according to Simon Maughan, a banking analyst at Olivetree Securities Ltd. in London, because he took over in 2008, after the alleged Libor manipulation began, and couldn’t have been expected to have oversight of all parts of the business immediately.

“There’s no doubt that this isn’t going to be good for Hester,” Maughan said. “But I’d be very surprised if he’s forced out” because of it.

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